India’s retail investors are ditching mutual funds to put money directly into stock markets, lured by soaring share prices and lacklustre returns at mutual funds in recent years. Domestic investors have withdrawn 275 billion rupees ($3.80 billion) from equity mutual funds in the year to Feb. 16, according to data from the Securities and Exchange Board of India (SEBI), after dumping a total of 545 billion rupees in 2020.
Meanwhile, the number of ‘Demat accounts, which contain retail investor holdings in securities in electronic format, increased 27% last year to stand at 49.8 million at the end of 2020. The aversion towards mutual funds is also due to their higher management fees and low returns.
According to Refinitiv Lipper data, the average return over a 3-year period for the 498 mutual funds surveyed was 2%, much lower than the 12% return for the NSE Nifty 50 index in that period. A polarised rally has also affected the performance of mutual funds. The top 10 stocks by market capitalisation in the Nifty 50 index accounted for two-thirds of the price gains over the past year.
The rise in Demat accounts also comes as millennials, faced with job losses and pay cuts due to the COVID-19 pandemic, dabble in stock markets directly to try to make some extra income while staying at home. Unlike mutual funds, the stock market doesn’t need an individual to be consistent and stable and this inconsistency is drawing the attention of the millennials who are facing unpredictable times during the pandemic.
A large number of blue-chip shares were available at multi-year lows after a sell-off in March last year. Some of the most battered large-cap stocks, such as Reliance Industries NSE and State Bank of India, have more than doubled in price since March.
Impact on the Venture Capital Community
Another rising trend witnessed is the rise in the number of individuals investing in the stock market. Individual investors have always been a part of the venture capital ecosystem, but they generally have written small checks for the earliest-stage companies. But it’s getting increasingly common to see deals where solo investors invest in and even lead Series A or late-stage rounds.
This sudden peak is due to the recent market opportunity presented before the public offered by the pandemic. Their rise comes as investors of all sorts clamour to pour funds into the booming venture capital asset class, and many founders view certain solo investors as a special talent who can give their startup a boost. The venture capitalist industry may face a setback due to the rising solo investment trend and it may act as a challenge for the upcoming VC industry.